Treasury and the IRS Issue Proposed Regulations for FATCA Implementation

On February 8, 2012, the U.S. Treasury Department and the Internal Revenue Service issued proposed regulations for the next major phase of implementing the Foreign Account Tax Compliance Act (FATCA).

FATCA and FFI Reporting under Proposed Regulations

FATCA was enacted by the U.S. Congress in 2010 as part the Hiring Incentives to Restore Employment (HIRE) Act. This law specifically targets non-compliance by U.S. taxpayers using foreign accounts.

FATCA requires foreign financial institutions (FFIs) to report to the IRS information about financial accounts held by U.S. taxpayers, or by foreign entities in which U.S. taxpayers hold a substantial ownership interest.

The proposed regulations lay out a step-by-step process for U.S. account identification, information reporting, and withholding requirements for FFIs, other foreign entities, and U.S. withholding agents.

The proposed regulations implement FATCA’s obligations in stages to minimize burdens and costs consistent with achieving the Congress’ compliance objectives. The rules and implementation schedule are also adjusted to allow time for resolving local law limitations to which some FFIs may be subject.

In order to avoid being withheld upon under FATCA, a participating FFI will have to enter into an agreement with the IRS to:

a) Identify U.S. accounts,
b) Report certain information to the IRS regarding U.S. accounts,
c) Verify its compliance with its obligations pursuant to the agreement, and
d) Ensure that a 30-percent tax on certain payments of U.S. source income is withheld when paid to non-participating FFIs and account holders who are unwilling to provide the required information.

Registration will take place through an online system which will become available by January 1, 2013. FFIs that do not register and enter into an agreement with the IRS will be subject to withholding on certain types of payments relating to U.S. investments.

Effect of FATCA Regulations on Non-Disclosure of Foreign Accounts

Once implemented, the regulations will mark a major breakthrough in IRS efforts to identify U.S. taxpayer non-compliance through offshore holdings. In essence, the FFIs reporting will supply the IRS with continuous and accurate information that will allow them to identify failure to by the US taxpayers to disclose foreign financial accounts.

Armed with this information, one can expect the IRS to acquire new tremendous enforcement tools throughout the world. It is very likely that the IRS will be able to substantially increase its investigations of non-compliant U.S. taxpayers as well as successfully prosecute them.

Immediate Effect of FATCA: Urgency in Voluntary Disclosures

Thus, the ultimate effect of FATCA will be felt on the number of voluntary disclosures. At this point, a large number of currently non-compliant U.S. taxpayers are in high danger of being discovered and prosecuted by the IRS within relatively near future.

Since voluntary disclosure is not generally available in case of IRS investigation and/or prosecution, it appears that the need for these taxpayers to engage in voluntary disclosure is becoming increasingly urgent. Combined with other creation of FATCAForm 8938 – I expect to see a large number of voluntary disclosures in 2012.

Contact Sherayzen Law Office for Help With Offshore Voluntary Disclosure

If you currently have undisclosed foreign bank and financial accounts or unreported foreign income, contact Sherayzen Law Office. Our experienced voluntary disclosure firm will help you identify the extent of your tax reporting requirements, analyze your potential tax liabilities, describe available voluntary disclosure options, and guide you throughout your voluntary disclosure, including completing the required documentation, setting forth your legal case, and rigorous IRS representation.